LONDON European shares tumbled by more than 3 percent early on Monday as a distress sale of Bear Stearns pushed rattled investors to dump financials, fearing contagion across the banking system.
The euro hit a new high against the dollar and crude continued to surge to new records, compounding the woes of companies in the region.
At 0920 GMT (5:20 a.m. EDT), the FTSEurofirst 300 was down 3.2 percent at 1,215.32, tracking big losses in the United States and Asia after JP Morgan unveiled a takeover of stricken rival Bear Stearns at a rock-bottom price.
Banks led losers, with UBS, Royal Bank of Scotland and Barclays all falling more than 8 percent. HBOS and Alliance & Leicester slid more than 11 percent.
"There's turmoil in all markets after Bear Stearns, and equities is not the place to be," said BNP Paribas strategist Edmund Shing.
"Everyone's asking: Who's next? Is there a Bear Stearns in Europe, could investment banks start to fail?"
"It's clear that Bear was by far the most exposed to mortgage-backed securities relative to their size and were also hit by failure of their internal hedge funds," he said, but added there was uncertainty about the extent of European bank losses.
Investors were also on edge ahead of earnings reports later in the week from top U.S. investment banks.
The Fed cut its discount rate on Sunday by a quarter point to 3.25 percent and launched a new facility that would allow U.S. primary dealers, mainly investment banks, to tap the discount window in a tool not used since the Great Depression.
Across Europe, Britain's FTSE 100 was down 2.6 percent, Germany's DAX slumped 3.8 percent and France's CAC lost 3 percent.
The euro a new high of $1.5904, and oil was trading 1 percent higher at $111.29 a barrel, having hit a record $111.80 earlier.
PROFIT WARNING GROUNDS SIEMENS
The DAX's underperformance was driven by a profit warning from engineering heavyweight Siemens, which tumbled 12 percent.
"With today's bad news -- basically another 1 billion euros in shareholders' equity lost -- we believe sentiment and investor confidence will hardly improve," Cheuvreux said of Siemens in a note. Rival Alstom slid 7 percent.
But there were big gainers that stuck out in the sea of red.
British Energy soared 17 percent after saying it was in talks that could lead to a business combination or an offer.
Greece's OTE jumped 11.6 percent after Deutsche Telekom said it was buying a 20 percent stake in the company.
But analysts focused on the bigger picture, with some saying the JP Morgan move on Bear Stearns was a positive in the longer run.
"This is not good news for business, or for those who work there, but it must happen as the Fed can't keep propping up banks. There must be blood and this is part of it," said Justin Urquhart Stewart at 7 Investment Management.
All eyes are on the Fed again before its rate-setting meeting on Tuesday. Fed fund futures showed an 88 percent chance that it will serve up a 100 basis point cut on Tuesday in the federal funds rate.
Credit spread widened in Europe, with fears that liquidity problems could extend to other banks driving credit default swaps for banks wider.
"The Fed has to keep on cutting interest rates even if the widening spreads in the credit markets are currently frustrating its efforts to loosen monetary conditions," Brewin Dolphin chief strategist Mike Lenhoff said in a note.
(Additional reporting by Eva Kuehnen in Frankfurt; Editing by Quentin Bryar)